Ital­ian par­ties agree to ba­sis for gov’t deal, say no threat to euro


ROME (Reuters) – Italy’s two anti-es­tab­lish­ment par­ties agreed the ba­sis for a gov­ern­ing accord on Thurs­day that would slash taxes, ramp up wel­fare spend­ing and pose the big­gest chal­lenge to the Euro­pean Union since Bri­tain voted to leave the bloc two years ago.

Lead­ers of the far-right League and the 5-Star Move­ment, which emerged as two of the big­gest par­ties from an in­con­clu­sive elec­tion on March 4, have been dis­cussing a com­mon pol­icy agenda to form a coali­tion gov­ern­ment and end more than 10 weeks of stale­mate.

When 5-Star leader Luigi Di Maio emerged from a four-hour meet­ing with League chief Mat­teo Salvini, he said the two par­ties had to ham­mer out a few “mi­nor de­tails” and that the pro­gram should be fi­nal­ized later in the day.

Mo­ments ear­lier, a 5-Star source had said the pro­gram had been sub­stan­tially agreed and that it con­tained no ref­er­ence to a pos­si­ble exit from the euro or “any­thing that could cause any con­cern re­gard­ing Italy’s euro mem­ber­ship.”

The accord has yet to be made pub­lic and still needs to be rat­i­fied by both par­ties’ mem­bers, as well as gain­ing ap­proval from Italy’s pres­i­dent. The par­ties had made progress on agree­ing a prime min­is­ter, Di Maio said, but he did not give a name.

A draft of the accord re­viewed by Reuters ear­lier on Thurs­day spelled out a spend­ing plan that would breach EU rules on fis­cal dis­ci­pline: cut­ting taxes, in­creas­ing wel­fare pay­ments for the poor and scrap­ping an un­pop­u­lar pen­sion re­form.

The poli­cies would cost many bil­lions of eu­ros and have spooked in­vestors in Ital­ian debt, shares and the euro. Italy is the euro zone’s third-largest econ­omy.

In a di­rect chal­lenge to EU fis­cal rules, the draft accord also called for the bloc to cre­ate fis­cal head­room for spend­ing by ad­just­ing the for­mula used to cal­cu­late Italy’s debt bur­den, which the rules say must be re­duced.

In cal­cu­lat­ing debt as a pro­por­tion of gross do­mes­tic prod­uct – Italy’s ra­tio of more than 130% is sec­ond only to Greece in Europe – the draft accord pro­poses dis­count­ing hun­dreds of bil­lion eu­ros in Ital­ian debt pur­chased by the Euro­pean Cen­tral Bank un­der the bank’s quan­ti­ta­tive eas­ing pro­gram.

On Thurs­day, the EU’s sta­tis­tics of­fice said it can­not ex­clude Ital­ian bonds held by the Euro­pean Cen­tral Bank from its debt cal­cu­la­tions.

News of the draft accord has caused con­cern in Brus­sels, where Euro­pean Com­mis­sion Vice Pres­i­dent Valdis Dom­brovskis told the EU par­lia­ment on Thurs­day that Italy’s new gov­ern­ment should stick to fis­cal dis­ci­pline and keep re­duc­ing pub­lic debt.

“This is our mes­sage to the new gov­ern­ment. It’s im­por­tant to stay the course,” Dom­brovskis said.

Italy’s bor­row­ing costs have been rising as de­tails of the accord emerge. The gap be­tween the yields on Italy’s bench­mark bonds and safer Ger­man bonds was at its widest since early Jan­uary as Ital­ian 10-year bond yields were set for their big­gest two-day jump since March last year.


Out­go­ing Prime Min­is­ter Paolo Gen­tiloni told a meet­ing of EU lead­ers in Bul­garia that he and other lead­ers were wor­ried that fun­da­men­tal issues such as the need to safe­guard pub­lic ac­counts were now up for po­lit­i­cal dis­cus­sion.

The draft pact proposed a new “uni­ver­sal in­come” for the poor costed at €17 bil­lion, while it said a planned soft­en­ing of an un­pop­u­lar pen­sion re­form would cost €5bn.

The plan promised to in­tro­duce a 15% flat tax rate for busi­nesses and two tax rates of 15% and 20% for in­di­vid­u­als – a re­form long pro­moted by the League. Econ­o­mists say this would cost well over €50b. in lost rev­enue.

There was still no word on the thorny is­sue of who would be prime min­is­ter. Nei­ther Salvini nor Di Maio wants the other to get the job.

Pres­i­dent Ser­gio Mattarella, who has re­peat­edly stressed the im­por­tance of main­tain­ing a strong, pro-Euro­pean stance, may also be dis­mayed at the deal the League and 5-Star come up with.

Each party plans to con­sult its sup­port­ers over the week­end to see if they back the nascent gov­ern­ment pact. The pol­icy pro­gram will prob­a­bly be pub­lished on Thurs­day, 5-Star said.

(Ciro De Luca/Reuters)

5-STAR MOVE­MENT LEADER Luigi Di Maio casts his vote in Pomigliano d’Arco in March.

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